On February 28, 2026, the United States and Israel launched Operation Epic Fury against Iran.
As the war enters its third week, the scale is staggering: at least 1,348 Iranian civilians killed and over 17,000 injured, 3.2 million displaced, approximately 6,000 US strikes, and a new supreme leader – Mojtaba Khamenei – vowing to keep the Strait of Hormuz closed. The International Energy Agency warns of the ‘largest supply disruption in the history of the global oil market’. Oil has breached US$100 a barrel. More than 820,000 have been displaced in Lebanon as Israel-Hezbollah hostilities reignite.
For Australia, geographically distant but entangled through alliance commitments, intelligence infrastructure, energy dependence, and a 115,000-strong diaspora in the Middle East, the ramifications are immediate. In financial economics, alliance membership functions like a call option – the right to draw on a protector’s military power, but at a price paid in sovereignty foregone, bases hosted, and conflicts joined. The Iran crisis is Australia’s margin call. The price is suddenly, painfully visible.
The alliance reflex
The Albanese government endorsed Operation Epic Fury with speed that surprised even American officials, while insisting Australia was ‘not participating’ offensively. By 10 March, that distinction had eroded: Albanese deployed an E-7A Wedgetail early warning aircraft, air-to-air missiles for the UAE, and 85 Australian Defence Force personnel to the Gulf. The Wedgetail’s capacity to map missile launch locations and coordinate battle management in real time makes it far more than a passive shield – the line between defensive and offensive enablement is, as one analyst observed, a blurry one at best.
It has since emerged that three Royal Australian Navy sailors were aboard the US submarine that torpedoed the Iranian frigate IRIS Dena near Sri Lanka on March 4 – the first US submarine torpedo attack since the second world war. Albanese confirmed their presence but insisted they did not take part in offensive action. Meanwhile, the Joint Defence Facility Pine Gap near Alice Springs – now hosting 45 satellite radomes and dishes – continues to provide real-time intelligence across the Middle East. A former NSA analyst confirmed in 2023 that Pine Gap was collecting data on the Gaza conflict and ‘surrounding areas’. That intelligence flows to Washington and, in turn, to Israel. Having invested decades in this facility, Australia cannot credibly claim neutrality. It is infrastructure that commits the country irrevocably – a strategic investment with no exit clause.
The Indo-Pacific opportunity cost
Here is the dimension that should concern Australian strategists most. In what economists call ‘real options’ theory, the value of an investment depends on keeping the opportunity alive until conditions are ripe. Aukus is precisely such an option: a ticket to a credible submarine deterrent, but only if the US industrial base and technology transfers remain available. The Iran conflict is degrading every one of those conditions.
The US submarine industrial base produces around 1.2 Virginia-class boats per year against a combined requirement of 2.3. An Iran war that diverts Navy priorities means no spare construction capacity for Australian boats. Congressional approvals, State Department licences, and Department of Energy support all stall when those agencies are managing Iran’s nuclear fragments. Australia’s planned 2030s submarine delivery could slip to the 2040s. We know the cost of American distraction: between 2001 and 2020, while Afghanistan and Iraq consumed US bandwidth, China militarised the South China Sea, developed carrier-killing missiles, and built the world’s largest navy. The US has already spent over US$11 billion in Epic Fury’s first week. As the Hudson Institute’s Zineb Riboua has argued, every dollar spent defending Red Sea shipping lanes is a dollar unavailable for Pacific basing or Taiwan contingency planning.
Fat tails at the fuel bowser
Australia imports roughly 90 per cent of its refined liquid fuel. The Strait of Hormuz, carrying a fifth of global petroleum, has been reduced to what the IEA calls ‘a trickle’ – global supplies down an estimated 8 million barrels per day. IEA members have agreed to release 400 million barrels from emergency stockpiles, the largest coordinated release in history, but analysts warn this only partially offsets prolonged disruption.
For anyone who studies what statisticians call ‘fat-tailed’ distributions – events that are rare but devastating when they occur – this is a textbook case. Australia’s fuel supply architecture is built for normal times: 36 days of strategic reserves against an IEA benchmark of 90. According to Westpac’s modelling, a one-month Hormuz disruption lifts the Australian CPI by approximately 1 percentage point; a three-month closure spikes it by 1.5 points and reduces GDP by 0.5 points. Petrol prices could rise 40 cents per litre. LNG prices have surged 12 per cent, and Qatari production remains halted. These pressures compound: higher oil costs flow through shipping, fertilisers, and manufacturing into broader inflation, landing on an economy where the RBA is already navigating delicate disinflation.
115,000 reasons to worry
An estimated 115,000 Australians were in the Middle East when the conflict erupted – what Foreign Minister Penny Wong called ‘a consular crisis that dwarfs any that Australia has had to deal with’. The closure of airspace across Bahrain, Iraq, Iran, Qatar, Kuwait, and Syria stranded thousands. By March 10, over 2,600 had returned on 18 flights from the UAE. Tens of thousands remain, with Smartraveller now advising against all travel to the UAE, Qatar, Kuwait, Bahrain, Israel, and Lebanon. Bus convoys to Kuwait and Bahrain, overland routes to Oman, and limited commercial flights have been the improvised lifelines. Canberra also granted asylum to five members of Iran’s women’s football team who were in Queensland for the AFC Women’s Asian Cup – a gesture that only hints at the potential for larger refugee flows if the conflict deepens further.
The rules-based order – selectively applied
Operation Epic Fury was launched without UN Security Council authorisation. Ben Saul, the UN Special Rapporteur on the promotion and protection of human rights and fundamental freedoms while countering terrorism, has stated that Iran had not enriched uranium to the point of building a nuclear device – the case for self-defence, in his words, ‘does not fall anywhere close’. Australia’s refusal to address the strikes’ legality places it in what ANU’s Don Rothwell calls a ‘say nothing’ posture – conspicuously at odds with its willingness to assert the illegality of Russia’s invasion of Ukraine.
In my own work on alliance behaviour, I model geopolitical commitments using the same frameworks that price financial options. International law functions as a hedge – an insurance policy limiting everyone’s downside. When a country lets that insurance lapse for allies while enforcing it against adversaries, it is strategically exposed. For a middle power whose influence rests on normative authority rather than military mass, this shapes standing in ASEAN, the Pacific Islands Forum, and every multilateral setting where Western double standards are a live issue. Domestically, the Greens’ Senator Larissa Waters captured the mood of many when she warned that ‘every day Trump and Netanyahu’s demands of Australia keep growing’ and accused Labor of having ‘no red lines’. Australia’s significant Iranian, Israeli, Lebanese, and broader Middle Eastern diaspora communities bring both personal grief and political intensity to the debate.
The energy transition as strategic hedge
If the conflict carries a silver lining, it may be in strengthening the case for energy transition. Renewables and storage now provide nearly 45 per cent of electricity on Australia’s main grid and contributed to halving wholesale power prices in late 2025. Renewable energy is a natural insurance policy against geopolitical oil shocks: its fuel cost is zero and its supply chain is overwhelmingly domestic. Accelerating electrification of transport, homes, and industry reduces exposure to precisely the kind of extreme energy price events that the Strait of Hormuz crisis illustrates. But the transition is capital-intensive: a one-year delay in wind or transmission projects could increase residential power prices by up to 20 per cent. The conflict sharpens both the urgency and the stakes.
The margin call
The Iran conflict is a stress test for Australian strategic policy on every front: alliance dependence, energy fragility, consular capacity, and commitment to international law. Most importantly, it reveals the opportunity cost in the Indo-Pacific. Every month of Middle Eastern entanglement is a month in which Aukus– and a credible deterrent posture in the Western Pacific – loses value. The conflict is not just consuming Australian resources. It is consuming the strategic future those resources were meant to buy.
For policymakers, the lessons are uncomfortable but clear. Diversification – of energy sources, strategic relationships, and economic exposure – is not merely desirable but urgent. The capacity to make independent strategic judgements, rather than reflexively aligning with allied positions, must be cultivated alongside the alliance itself. International law must be applied consistently, not selectively invoked when adversaries breach it and quietly set aside when allies do the same. The margin call has arrived. The question is whether Australia can pay it without liquidating the portfolio.
